Kroog v. Mait

• Decision Date: 15 July 1983
• Docket Number: No. 83-1094,83-1094
• Citation: 712 F.2d 1148
• Parties: Blue Sky L. Rep. P 71,827, Fed. Sec. L. Rep. P 99,418 Natalie KROOG, Plaintiff-Appellee, v. Steven MAIT and Paine, Webber, Jackson & Curtis, Inc., a foreign corporation, Defendants-Appellants.
• Court: U.S. Court of Appeals — Seventh Circuit

Page 1148

712 F.2d 1148

Blue Sky L. Rep. P 71,827, Fed. Sec. L. Rep. P 99,418

Natalie KROOG, Plaintiff-Appellee, v. Steven MAIT and Paine, Webber, Jackson & Curtis, Inc., a

foreign corporation, Defendants-Appellants.

No. 83-1094.

United States Court of Appeals, Seventh Circuit.

Argued May 13, 1983.

Decided July 15, 1983. ^*

Don S. Peterson, Minahan & Peterson, S.C., Milwaukee, Wis., for defendants-appellants.

Bruce C. O'Neill, Fox, Carpenter, O'Neill & Shannon, Milwaukee, Wis., for plaintiff-appellee.

Before WOOD and ESCHBACH, Circuit Judges, and CAMPBELL, Senior District Judge. ^**

HARLINGTON WOOD, Jr., Circuit Judge.

In this appeal, we are called on to decide whether a provision of the Wisconsin Uniform Securities Law which has the effect of negating an otherwise valid arbitration clause in a securities brokerage contract is preempted by Section 3 of the Federal Arbitration Act, 9 U.S.C. § 3, which requires that "[i]f any suit or proceeding be brought in any of the courts of the United States upon any issue referable to arbitration under an agreement in writing for such arbitration, the court ... shall ... stay the trial of the action until such arbitration has been had ...." Because this is a clear case of "actual conflict" between federal and state law as a result of which compliance with both is a "physical impossibility," Florida Lime and Avocado Growers, Inc. v. Paul, 373 U.S. 132, 141-43, 83 S.Ct. 1210, 1216-1217, 1218, 10 L.Ed.2d 248 (1963), we hold, contrary to the district court, that the Arbitration Act must prevail under the Supremacy Clause.

I.

Plaintiff-appellee originally commenced this action in the County Court for Milwaukee County, Wisconsin, seeking to recover losses in her securities brokerage account allegedly caused by defendants-appellees' conduct in violation of the Wisconsin Uniform Securities Law and in violation of the common law. The first cause of action alleged that defendant Mait, as an "agent," bought and sold securities in Wisconsin in violation of the registration requirements contained in the Wisconsin Uniform Securities Law, Wisc.Stat. §§ 551.31(1) and (2), 551.59(1). The second claim alleged that, because Mait was not properly registered, the brokerage contract between the parties was void and subject to rescission. The remaining three causes of action alleged defendants' liability under the common law theories of mismanagement, unsuitable purchases, excessive trading, and breach of fiduciary duty.

Defendants removed the action to federal district court on the basis of diversity. After answering the complaint, defendants moved to stay the proceedings and compel arbitration pursuant to paragraph 15 of the brokerage contract which provided,

Any controversy between us arising out of or relating to this contract or the breach thereof, shall be settled by arbitration in accordance with the rules, then obtaining, of either the Arbitration Committee of the New York Stock Exchange, American Stock Exchange, National Association of Securities Dealers or where appropriate, Chicago Board Option Exchange or Commodities Futures Trading Commission, as I may elect. I authorize you if I do not make such election, by registered mail addressed to you at your main office within fifteen (15) days after receipt of notification from you requesting such election, to make such election in my behalf. Any arbitration hereunder shall be before at least three arbitrators and the award of the arbitrators, or of a majority of them, shall be final, and judgment upon the award rendered may be entered in any court, state or federal, having jurisdiction. (emphasis added).

In further support of their motion to stay, defendants noted the requirements of the Federal Arbitration Act which provide,

If any suit or proceeding be brought in any of the courts of the United States upon any issue referable to arbitration under an agreement in writing for such arbitration, the court in which such suit is pending, upon being satisfied that the issue involved in such suit or proceeding is referable to arbitration under such an agreement, shall on application of one of the parties stay the trial of the action until such arbitration has been had in accordance with the terms of the agreement, providing the applicant for the stay is not in default in proceeding with such arbitration.

9 U.S.C. § 3. Defendants argued that since the controversy at hand arose out of or related to the brokerage contract which was in interstate commerce, and was exactly the kind of dispute the arbitration clause was meant to deal with, the court was required to stay the action and compel arbitration.

Plaintiff opposed the motion to stay, arguing that submission of the dispute to arbitration was forbidden by the Wisconsin Uniform Securities Law, Wisc.Stat. § 551.59(8), which provided, "Any condition, stipulation or provision binding any person acquiring any security to waive compliance with any provision of this chapter or any rule or order hereunder is void." Submitting the dispute to arbitration, plaintiff argued (and defendants apparently conceded) would effectively deny plaintiff the protection of this non-waiver provision. And Congress, plaintiff argued, could not have intended the commands of the Arbitration Act to overcome such a provision forbidding arbitral waiver of state securities laws. In support of her argument, plaintiff noted that Section 15 of the Federal Securities Act of 1933 specifically forbade waiver of the protection of the Act's provisions, and that this section was subsequently held by the Supreme Court in Wilko v. Swan, 346 U.S. 427, 74 S.Ct. 182, 98 L.Ed. 168 (1953), to bar application of Section 3 of the Arbitration Act to stay actions arising under the Federal Securities Act in which the underlying contract contained an arbitration agreement. Plaintiff further argued that since Congress has specifically mandated dual federal-state regulation in the field of securities regulation through Section 18 of the 1933 Securities Act and Section 28(a) of the 1934 Exchange Act and Wisconsin has, pursuant to this authority, enacted an anti-waiver provision nearly identical to the federal provision which was held to eclipse the Arbitration Act in Wilko, surely under the pattern of legislative intent discerned in Wilko, Congress did not mean the federal Arbitration Act to overcome a state non-waiver provision promulgated pursuant to residual state securities regulation power. ¹

The district court agreed with the plaintiff that the Federal Arbitration Act did not require that her first two claims alleging violation of the Wisconsin Securities Law be arbitrated in light of the anti-waiver provision contained in Wisc.Stat. § 551.59(8). ² The district court began its analysis with the premise that

[f]ederal regulation of a field must not be deemed preemptive of state regulatory authority in the same field in the absence of good reason. The exercise by a state of its inherent police power, which would be perfectly valid in the absence of federal action, is not preempted unless the intention of Congress to do so is clearly manifested in the federal legislation.

The court then posed the issue as a conflict between the mandate of the Arbitration Act and the entire Wisconsin securities regulation scheme, rather than as a conflict between the procedural requirements of the Arbitration Act and the contrary state procedural provision:

The case at bar presents a state remedial statute which adopts a uniform scheme of economic regulation, enacted pursuant to the state's inherent police power, containing an 'anti-waiver provision.' This state enactment conflicts with a strong federal policy favoring arbitration expressed in the generalized Federal Arbitration Act.

Thus, the district court identified the preemption battlefield involved in this case as that of securities law rather than that of policies concerning informal dispute resolution:

... the conflict occurs in a subject matter area (securities law) in which the federal enactments contain clear and unequivocal language that they are not to be construed so as to preempt state regulation. See § 28a 1934 Act, and § 18, 1933 Act.

Having posed this conflict and noting that its own conclusion had been rejected by other district courts, ³ the court here stated its position that

because this is a case where the state law involves inherent police power; is remedial in nature; presents a legislatively created cause of action; contains an anti- waiver clause; and deals with an area of the law in which Congress has expressly indicated it has not preempted state regulation, this Court is of the opinion that the statute can withstand the generalized provisions of the Federal Arbitration Act.

Accordingly, the district court denied the defendants' motion to stay proceedings and compel arbitration. From this determination, defendants appeal.

II.

The Supreme Court has mandated that federal preemption questions be addressed through a two-tier inquiry. The reviewing court must first ask whether there is "such actual conflict between the two schemes of regulation that both cannot stand in the same area." Florida Avocado Growers, Inc. v. Paul, 373 U.S. 141, 83 S.Ct. 1217 (1963). If such "actual conflict" is found, the inquiry is at an end. Or, as the Supreme Court has stated, "A holding of federal exclusion of state law is inescapable and requires no inquiry into congressional design where compliance with both federal and state regulation is a physical impossibility for one engaged in interstate commerce...." Id. at 142-43, 83 S.Ct. at 1217. (emphasis added). In short, the assessment of "actual" or "facial" conflict is a threshold inquiry we cannot escape; only if this inquiry is answered negatively can we entertain arguments as to the intent of Congress to occupy the field or preclude the kind of state regulation at issue. Pacific Gas and Electric Co. v. State Energy Resource...